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Mahindra Finance: Good quality growth

Apr 24, 2012

Mahindra Finance declared its results for the fourth quarter of financial year 2011-2012 (4QFY12). The company has reported 47% YoY growth in income from operations and 46% YoY growth in net profits for the period. Here is our analysis of the results.

Performance summary

Income from operations grows by 42% YoY and 47% YoY during FY12 and 4QFY12 respectively.

Consolidated advances grow by 46% YoY on the back of 37% YoY growth in assets under management.

Value of assets financed grows 35% YoY over the past 12 months.

Net interest margins increase substantially from 5.8% in FY11 to 7.0% in FY12.

Bottomline grows by 31% YoY during FY12 and 46% YoY in 4QFY12 largely on the back of growth in net interest income and other income.

Capital adequacy ratio remains healthy at 18% at the end of FY12.

Mahindra Finance declares a dividend of Rs 14 per equity share, implying a dividend yield of around 2%

Consolidated performance snapshot

Rs (m)

4QFY11

4QFY12

Change

FY11

FY12

Change

Income from operations

5,978

8,803

47.3%

20,256

28,849

42.4%

Interest expense

1,974

3,391

71.8%

6,662

11,399

71.1%

Net Interest Income

4,005

5,412

35.1%

13,594

17,450

28.4%

Net interest margin

5.8%

7.0%

Other Income

60

112

86.4%

130

255

96.2%

Other Expense

1,413

1,699

20.2%

4,706

6,289

33.6%

Provisions and contingencies

80

189

136.5%

1,540

1,803

17.0%

Profit before tax

2,571

3,636

41.4%

7,477

9,613

28.6%

Tax

915

1,210

32.3%

2,541

3,168

24.7%

Minority interest

1

2

47.0%

9

10

15.0%

Profit after tax/ (loss)

1,655

2,424

46.4%

4,928

6,435

30.6%

Net profit margin (%)

27.7%

27.5%

24.3%

22.3%

No. of shares (m)

104.0

Book value per share (Rs)*

286.7

Price to book value (x)*

2.3

* Book value as on 31st March 2012

The auto sector has not had a brilliant run this year, but growth picked up towards the end of the fiscal as customers geared to buy vehicles before the Union Budget announcement. Mahindra Finance's growth that caters primarily to the semi-urban and rural markets, was a different story altogether. The company saw a robust 27% YoY growth in new customer contracts. This is a testament to the fact that the institution has been able to reap benefits of higher cash flows in rural India. Despite multiple rate hikes, the lender still managed to grow its advances by 46% in FY12. The company has added 11% more branches over the same period last year, and plans to add branches at a similar run rate going forward. This is in line with the company's strategy to increase its delivery channels in order to fuel growth. Most car manufacturers are looking at rural India to offset slowing growth in urban areas, and Mahindra Finance is thus a key beneficiary of this shift. Besides Mahindra vehicles and Maruti cars, the company is also seeing increased demand from other manufacturers like Hyundai, Ford and Toyota.

The company saw a 46% YoY growth in advances during FY12. It also added around 60 new branches during the year to be able to service a bigger customer base. This growth in advances came in slightly higher than our estimates. We clearly do not see the current growth rates being sustainable over the longer term.

Dynamic growth...

(Rs m)

FY11

% of total

FY12

% of total

Change

Advances

126,000

183,840

45.9%

Borrowings

97,846

146,464

49.7%

Secured

84,349

86.2%

124,650

85.1%

47.8%

Unsecured

13,497

13.8%

21,814

14.9%

61.6%

Credit borrowing ratio

128.8%

125.5%

Mahindra Finance, which was once predominantly a financer of tractors and utility vehicles sold by M&M, now has an almost 46:54 mix of M&M and non M&M vehicles, de-risking its portfolio to some extent. It saw most of its incremental disbursements go to cars, CVs and construction equipment.

Disbursement mix

(%)

FY11

FY12

Auto / utility vehicles (M&M)

29

27

Tractors (M&M)

22

19

Cars and other non M&M vehicles

33

33

CVs and Construction equip.

7

11

Used vehilces & others

9

10

NPAs (non-performing assets) at the gross level moved lower from 4% in FY11 to 3% in FY12. Also, due to higher provisioning and a conscious effort to improve asset quality, the net NPAs stood lower at around 0.7% at the end of FY12. The provision coverage ratio was 78% at the end of the period. The company has invested in a legal system in a number of states, which has helped it recover some of its bad loans. This has helped the company maintain asset quality even in a tough environment. It also maintains a low loan to value (LTV) ratio of 70-75% which also helps contribute to better asset quality.

Its capital adequacy stands at 18% currently with a Tier 1 capital base of over 15.1%.

What to expect?

At the current price of Rs 671, the stock is trading at a multiple of 1.7 times our estimated FY14 adjusted book value. The company has seen robust growth, despite a tough environment and high interest rates and the management continues to be bullish on the space. Rural customers were not as affected by the rate hikes, as the financier is able to adjust the EMIs according to its customers' cash flows. However due to the higher rate environment Mahindra Finance saw a huge spike in its cost of funds. Margins, however, did not contract as lending yields were also higher. The company has also maintained superior asset quality and continues to improve its operating efficiency. The company has also started being more conservative on securitization, in anticipation of full RBI guidelines on the same. It has stopped up-fronting income on securitization income, and only the spread is booked as income, which is amortized over the period of the loan.

With the economy set for a slowdown, and the RBI revising its projections for GDP growth downwards to 7%, rural cash flows may get affected. Thus, going forward we expect loan growth to moderate somewhat. We currently have a 'Hold' view on the stock, however we still need to factor in the FY12 performance.

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